A bubble waiting to burst

Chris Chapel

PETER Everington is a candidate for the title of ''Doctor Doom'' with his negative views on Hong Kong financial markets.

Mr Everington, managing director of Regent Fund Management, said: ''The Hang Seng will fall to 6,000 by the end of this year and 4,000 by the end of next year and there will be terrific damage to the property sector,'' he said.

''Property prices will fall from their highs in the order of 40 to 50 per cent.

''Everything suggests to me that Hong Kong is a bubble about to burst, whether you are looking at residential rent or a supermarket saying prices have to rise because rents are skyrocketing.'' Mr Everington said while the Hong Kong stock market might look good in terms of the average market price earnings multiple, the attraction was an illusion.

''Look at property developers. Henderson Land is selling on 15 times historic earnings and 10 times prospective but that is based on a net after-tax profit margin of 70 per cent.

''You can do that in the good times but one day or another those margins will collapse.'' He said another ominous sign was the big involvement of Asia funds in the Hong Kong market.

''Five years ago, the typical Asia fund had 50 per cent invested in Japan.

''Now, most of them have 40 to 60 per cent of their assets in Hong Kong.'' Mr Everington's bubble view of the Hong Kong economy centres on the theory behind the Hong Kong dollar's peg to the US dollar.

When faced with enormous capital inflows such as last year, interest rates were, theoretically, the first safety valve, given that the Hong Kong dollar was pegged.

Interest rates ought to adjust sufficiently - downward - to discourage the inflow. What happened, though, was that they were unable to fall below zero and, with the dollar peg, the pressure escaped into asset values which hit the roof.

Mr Everington stressed he was in favour of a more flexible managed peg system or a full central bank along the lines of Singapore's Monetary Authority.

''What happened in Hong Kong last year was a tremendous bubble and now it's bursting,'' he said.

''There was a tremendous inflow of money from the United States.

''Normally the exchange rate would rise but it can't because of the peg.

''So, interest rates fall because of arbitrage.

''Then they hit zero effectively and can't go lower - they should have gone negative to discourage the capital inflow.

''So, we had a situation, for all of 1993, where the exchange rate didn't go up, interest rates didn't go down and the monetary system went berserk.

''The stock and property markets went up 100 per cent and that's a bubble that has to burst.''